17-20% fewer construction workers: Great Recession's lasting scar on housing supply
Areas hit hardest by the 2008 crash still can't build enough homes, with labor shortages explaining up to 40% of reduced construction
The 2008 housing crash decimated construction employment in hard-hit areas, creating labor shortages that continue to hamper housing production today, according to new research published in Real Estate Economics. The study, "The scarring of the Great Recession on construction labor and housing supply," examines this issue.
The study, by economist Thao Le, finds that regions experiencing severe housing busts during the Great Recession have persistently lower construction employment and housing production over a decade later, despite robust housing demand and price growth.
By the numbers
A 10% decrease in house prices during the Great Recession led to a 17-20% reduction in construction employment by 2019
This employment decline caused a 3.0-5.7% decrease in housing construction
Construction labor shortages account for 20-40% of the reduction in building permits attributable to the recession
The construction sector accounted for about 21% of total job losses across all industries during the downturn
By 2019, building permits remained 26% below the average annual supply levels of the two decades preceding the housing boom
Why it matters
The persistent labor shortage in residential construction helps explain America's housing supply crisis. It partially explains why buildings haven't kept pace with demand despite a decade of rising prices.
Unlike previous recessions, the Great Recession appears to have induced a structural change in construction employment and housing supply. This finding challenges the conventional wisdom that housing markets should naturally rebound when prices rise.
Between the lines
Areas that experienced severe housing busts during 2008-2009 show:
Persistently lower construction employment through 2019
Lower concentration of workers in construction relative to other industries
Higher wage growth in construction than in less-affected areas
Steeper house price increases post-recession
Similar recovery in construction business formation
These patterns suggest a downward shift in labor supply rather than weak housing demand.
Deeper dive
The research used several methodological approaches:
Cross-sectional variation in housing price declines to measure recession severity
Event-study design to track employment patterns before and after the recession
Instrumental variable approach to establish causality between employment and housing supply
Despite controlling for land-use regulations, land scarcity, and demographic factors, the labor supply effect remains strong and statistically significant.
The labor supply explanation
Multiple mechanisms may explain why construction workers haven't returned:
Immigration patterns changed, reducing a key source of construction labor
Workers permanently transitioned to other industries after prolonged unemployment
The recession altered perceptions about job security in construction, making it less attractive to new workers
Industry validation
The research aligns with industry surveys:
82% of homebuilders cited labor cost and availability as their top challenge in 2018, up from just 13% in 2011
Unfilled job rates in construction reached record highs in 2019
Most craft positions remain difficult to fill because applicants lack the necessary skills
Policy implications
Addressing housing affordability likely requires targeted policies to increase the construction workforce:
Enhanced training programs for construction trades
Incentives to attract and retain workers in the industry
Region-specific approaches focused on areas hardest hit by the recession
The bottom line
The study reveals how a one-time economic shock created lasting structural changes in construction labor markets, constraining housing supply and exacerbating affordability challenges across the country.
While construction workers benefit from higher wages in this supply-constrained environment, the reduced housing production continues to drive up costs for homebuyers and renters.